Why the Dollar Hit a Record Low

Those who may have hoped for a recovery in the US dollar have been sorely disappointed. The greenback hit a record low against the Euro and it will just be a matter of time before the EUR/USD hits 1.60. Before you know it, we’ll be talking about the possibility of one Euro being worth 2 US dollars. Although this may be far-fetched, who would have thought that the Swiss franc would be worth more than a US dollar?

Although the once-mighty greenback faces long-term pressures such as a depressed labor market that is expected to deteriorate further and the strong possibility of another contraction in retail sales, the latest round of dollar weakness was actually triggered by the following:

1) News that Lehman Brothers liquidated 3 of its investment funds due to “market disruptions.”

2) Concerns that the usually stubborn ECB President will hold his ground on inflationary pressures, which he did. Eurozone interest rates remain at 6 year highs despite clear signs of slowing growth.

3) Strong Eurozone and UK Economic Data - French and Italian industrial production both beat expectations while the UK trade deficit narrowed.

The dollar continued to remain under pressure as the trade deficit increased in the month of February. Even though everyone was looking for the weaker dollar to help boost trade, I forecasted an increase in the deficit because the previous drop in the ISM manufacturing index told us that it would be weak (Forecasting News). Jobless claims also dropped sharply but the improvement is primarily due to the Easter Calendar effect. I still expect claims for unemployment to rise especially since continuing claims remain at very high levels.

Not only is the US dollar trading at a record low against the Euro, but it also slipped below 7 Chinese Yuan. With this big psychological barrier breached, the G7’s criticism towards China’s currency regime will be limited.

Nothing has changed and if anything, ECB President Trichet has confirmed his hawkishness. US retail sales are due for release next week and with Linens ‘n Things (LIN) joining Domain, Fortunoff, and Sharper Image (SHRP) in filing for bankruptcy protection, consumer spending will contract for another month. Crude oil and gasoline prices have also hit a record high which is going to hurt consumer spending further.

Therefore: The dollar's slide is far from over.

Comments

[flow5]

No surprise, we live in a banana republic.

[Joe]

Isn't the dollar weakness, the value of the dollar, related to
a) the trade deficit (listed here):
www.americaneconomical...
and
b) the US debt (ever since borrowing heavily abroad)
www.brillig.com/debt_c.../

[ubernerd]

You'ld have to be blind not to see this coming.
Well, that, or the President.

[nukldrager]

flow5 is that another way of saying you are what you invest in?

[syruppy]

Bet against the dollar? Bet on the economy of old Europe?

Those that are betting against the dollar--for whatever their reasons--has increased the buying power of European Common Market companies and citizens. This, combined with low interest rates, increases investment in the US and high employment.

US exports have increased. Even France is buying Napa juices to make wine.

Betting against the dollar by putting your money on the Yuan, for example, would like petting a dog's tail because you are afraid that a pat on its head risks a bite.

[fabian]

I wouldn't put too much hope on a week $ boosting exports. When your biggest clients get poorer they buy less. Furthermore, the weak $ makes exports more expensive due to the increase in transportation costs. If you ship a 40' container filled with $ 100,000 of goods it represents an increase of about 4% since last year! It is a lot.
All this said, I think it is too late to bet against the $ unless you are a professional trader.